Are “Switching Costs” the key to solving Tech Antitrust?

The Power of Tech Companies

Over the past two decades, Tech Companies have disrupted several industries and devastated existing monopolies.

This is quite an accomplishment. Antitrust regulation itself has been unable to achieve this over the past 132 years. Economic theory actually recognizes this.

Some antitrust scholars have argued along with economist Joseph A. Schumpeter that when a monopoly position follows from or is accompanied by technological innovation, all Sherman Act bets should be off, in part because temporary monopoly is a natural concomitant of innovation and also because the “creative destruction” associated with innovation inexorably threatens existing monopolies and forces them to behave competitively:1

We’ve seen it happen before us:
Amazon — Disrupting the Retail Giants. Netflix — The Media Companies. Airbnb — The hotel industry, Uber — The Taxi Companies & so many others.

Tech Companies connect Service Providers with Consumers more efficiently & scalably than layers of existing Middlemen. In order to survive, the incumbents are forced to reinvent themselves or perish.

The profitability of Tech Companies is not surprising, they’re destroying a very profitable Middleman sector.

Antitrusts needs to create the right kind of regulations for Tech Companies, so they don’t end up like the incumbents. We want our Tech Companies to be trustworthy, innovative, dynamic & motivated to provide the best services possible to their users. 

Seems like a tall order, but we actually already know how to do this.

Misguided Antitrust

Some of the current efforts towards Antitrust are misguided, at best. They’re aiming at blocking the growth of large companies in the belief that this will allow smaller companies to grow & compete. 

The EU’s Digital Markets Act’s is slated to become law starting next year. A similar law is in the works in the US. An example of dysfunctional regulation is a rule included in both laws, called the “self-preferencing rule”. It’s intended to prevent Tech Giants from preferencing their own products over competitors.

At first glance this rule seems to make sense.

An example of “self-preferencing” is — Google giving higher visibility to it’s own shopping service over competing shopping services .

Lets look deeper at how this regulation will impact each of us.

The regulation ignores a basic reality — Users will often use an option that minimizes time & effort needed to adopt and use it. One which integrates with what they’re already using, even if it’s not the “best” option.

There’s a good reason for this. For instance, I personally lack the time & bandwidth to research every little utility I use. I need a trustworthy company to provide me a nice set of integrated options.

The key is a “Trustworthy company”. Rather than blocking companies from offering well integrated, default products that users like, Antitrust should ensure these companies are accountable to the user & worthy of their trust.

There is an even more important benefit to consumers that’s only enabled by the massive size of these Tech companies. 

Each of the larger Tech companies represents a large group of users. If companies are correctly incentivized, they have the clout to pressure existing oligopolies into better behavior.

For instance, Telecom companies do not want to be listed side by side with other providers in an apples-to-apples comparison of phone plans. Direct comparison is not in their interest as it moves them closer to being a commodity and reduces their profits.

A large company like Apple, representing 56% of US phone users, has the market power to set guidelines for Telecoms — “Provide a certain level of service/quality/price in order to be listed an option for iphone users when they initialize their phones”. 

Slightly smaller Telco players would see this as a temporary bridge to build market share. When they sign up with Apple, their market share would increase & larger players would be pressured into similar agreements. It would end up intensifying competition between the Telco’s.

The scale of a company is not the problem. The problem is when the company abuses that scale.

Antitrust’s job should be to ensure that Apple wants to do this for their consumers. Apple will only do it, if it’s the best way for them to retain their users.

Another instance is Travel, where potential disruption has actually been halted in it’s tracks because of misguided Antitrust.

There are 3 categories of players in the travel ecosystem, the Service Providers (Airlines, Hotels), the Consumer (us) & the Middlemen (Expedia, Booking.com, Hotels.com etc).

Despite strong competition between existing middlemen, managing travel is still painful. You need to read the detailed rules of each airline to understand their individual ticket types & luggage policies, it’s difficult to modify or cancel an entire trip. This is because large airlines, car rental companies & hotels have no incentive to standardize policies & inter-operate smoothly.

 Middlemen like Expedia and Travelocity lack the clout to pressure standardization across these providers. A provider will simply say “No” to one of these middlemen, and go via another, or market directly to consumers.

Suppose a company created an even bigger ecosystem — Maps & Geo Based Services, and their approach turns out to be resoundingly successful. They beat out all the existing Middlemen & take over 90% of the travel market.

With their massive user base, they can pressure airlines, hotels & car bookings to conform to ceratin standards & to offer reasonable cancelation/modification conditions. 

They also have the ability to ensure “capacity utilization” despite modifications & cancelations. Most importantly, they can ensure their users are treated fairly by the airlines.

One Tech Giant is perfectly positioned to undertake this — Alphabet via Google Maps.

Under the threat of planned antitrust law, Alphabet will not move in this direction. Nor will they investing in the use of AI & other technologies to build a truly integrated one-click travel experience of the type that Amazon created for Retail & no one has built yet for Travel.

Instead they restricts themselves to a very limited role — directing the consumer towards existing middlemen, to the sad detriment of the consumer.

The key question is -

How should Antutrust provide the right incentives to create “Trustworthy” Companies

Antitrust needs to create conditions where a company with massive market share, is still easily threatened by competition & completely accountable to users. Any drop in service quality should immediately open the floodgates to competitors.

For this to happen, Antitrust must lower Tech entry barriers drastically. 

In the Internet Economy “barrier to entry” is very very different from that in other industries.

User adoption is the key to growth. A superior product is needed, but ir’s not enough. If the “switching cost” born by the consumer is high, it’s very very difficult to get user traction & release exponential growth.

“Switching Cost” is the hurdle that causes promising young competitors to stumble & die.

Big Tech knows that the ability for users to leave them en mass is their achilles heel. 

From the perspective of their shareholders, and because they can get away with it, they lock in their users with extremely high switching costs. In fact they excel at this.

How Antitrust can lower “switching costs”

One of the major reasons for the long sticky domination of Oracle & SAP in Enterprise Financial Apps, Microsoft in Productivity Apps, has been “high cost of switching” to another provider, due to lack of standards for data portability & inter-operability between vendors. Although Enterprise Software is not the focus of this article, the same principles apply to the internet economy in general.

Tech Giants could be allowed to avoid antitrust scrutiny if their products adhere to a set of evolving principles — all aimed at minimizing “switching costs” for consumers.

Two of three big one’s have already been identified by antitrust 

1. Data portability — Users should be able to migrate their data from one company to another & maintain data history, with minimal effort. 
2. Interoperability between platforms — This is a key one, that has not had a lot of attention. If a company allows users inside it’s platform to communicate with each other, the same capability must be made available to other companies via open API’s. This means enabling direct communication between users of different social media services. Standardizing & implementing this will take a lot of effort & time, but it’s critically important in keeping our Tech Giants on their toes. Industry iteself has to drive it, because resulting standardized protocols must work for all companies.
3. Data Privacy +Rights — Privacy needs to be maintained by both companies. This already happens. The issue here is that users are often asked to choose between options that make little sense to them. The impact of the options presented to them must be made clear to them, in terms of what that choice means to them. For instance — “if you choose this option, ads will not follow you around”.

Antitrust’s role is to mandate that companies agree on and deliver such a framework. Then to monitor & ensure they continue to maintain these standards.

They could, for instance, create ways to crowdsource the “scoring” of Tech Giant performance on the above. If a Tech Giants score falls too low — they open themselves up to being investigated.

 Antitrust also needs proactively continue to identify additional pillars that affect consumer switching costs.

These actions should make it easier for users to easily switch & try new companies out. They wouldn’t lose any data, can still communicate with their contacts & have a way to switch back if they’re not happy.

Where switching costs are already low, has competition emerged?

The two cases I’m thinking of are Google Search & Amazon shopping.

In the case of Google Search, switching costs are indeed low. If an alternative search engine gives me equally good results, I can easily try them out. .

Similarly for Amazon, switching costs are not very high. If a viable alternative emerges that provides me the breadth of choice, easy comparison, reviews, quick shipping & low price, I could easily switch to it.

Has competition emerged in these two cases?

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Lets look ar Google first. Search in itself makes no money as it’s a free service. Alphabet makes money by advertising.

For the past few years, Amazon has been taking significant advertising market share away from Alphabet. When looking for something they need, users often go directly to Amazon & search.

Alphabet, in response, is countering by investing heavily in new ecosystems like Google Shopping, Google Maps & Youtube. All this benefits consumers. It’s good innovation & we should avoid regulation that will inhibit it.

In the case of Amazon , we also see alternatives emerging, albeit slowly.

There are two types -

1. Funded by the deep pockets of large retail (Costco, Home Depot, Best Buy, Target & Walmart).
2. Tech Giants like Alphabet + Shopify + Logistics providers (ShipBob, ShipHero, Cloudtrucks) collaborating to replicate Amazon’s one-click buying experience.

Even with low switching costs, rules like the self-preferencing rule could have inhibited this competition from emerging. It would have required Alphabet to display all competing comparison shopping services (CSS) at the same level as their own.

This creates a strong incentive for companies to create discrete CSS services, secure in the knowledge that they will be listed at the same level as Alphabet’s own service.

These discrete service choices would bloom, competition amongst them would increase & the non-Amazon market would continue to splinter into smaller pieces.

With regards to the utility of the discrete shopping services, when I’m looking for tennis shoes, I do not want to wade through 10–12 competing websites and drill down into each one searching for the right tennis shoe. I want an integrated “one-click” experience of the type Amazon provides.

Would one of these services grow up to compete against Amazon? Perhaps, but when you get an overcrowded field, it’s sometimes harder for one to gain enough traction to grow.

Fortunately enough, in the absence of the “self-preferencing rule”, an alternative ecosystem is actually emerging. It allows smaller retailers to -

• Create their storefront using Shopify, with Google Shopping as the front end search engine. Instead of using Shopify, smaller merchants can also simply list themselves for free & upload their own inventory via a daily spreadsheet.
• Use a logistics providers, like ShipBob, Flowspace, ShipHero etc or ship products on their own.
• The company gets basic analytics on their customers for free, with an option to pay for more sophisticated analytics and advertising.

TLDR 

[Summary]

When Tech companies provide integrated services & force competition on existing oligopolies, consumers benefit. Antitrust efforts aimed at hindering Tech from delivering integrated services are misguided — they hurt both the economy and consumers.

Instead Antitrust needs to ensure Tech is accountable to users. They can accomplish this by lowering switching costs for users. This means ensuring data portability & inter-operability.